Mobile Home Park Mastery: Episode 205

We’re Microsoft In 1996

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Bill Gates founded Microsoft in 1975, and went public in 1986, at a stock price around $1. By 1996, the stock had risen to around $4 per share – a 400% increase in only ten years. Many investors jumped at the chance to sell, thinking that Microsoft had reached its maximum value. Today, Microsoft stock trades at around $250 per share. In many ways, current mobile home park values are like Microsoft stock in 1996; only beginning their ultimate rise. In this Mobile Home Park Mastery podcast, we’re going to review the current pricing and give the reasons why this industry is only at the beginning stages of its ultimate value run.

Episode 205: We’re Microsoft In 1996 Transcript

In 1986, Microsoft went public at roughly about six cents per share. And by 1996, it was up tenfold to about $5.50 per share. Many people said, well, that's the end of it, it’s done its course, it's time to sell, let's sell at the peak and they sold Microsoft off. Others however held on to the stock. By 2006, he was up to $20.75 a share, up four times. By 2016, up to $55.74 per share up initial three times. And today the stock is trading at around $260 a share, up another five times. So were people smart in selling Microsoft off in 1996? No, they weren't, they should have held it. It still had a lot of room left to grow. This is Frank Rolfe, the Mobile Home Park Mastery podcast. We're going to talk about how mobile home parks are a whole lot like Microsoft, circa 1996.

Sure our values are up. No question of that. In the 25 years I've been in the business values have risen steadily throughout that entire period. But it doesn't mean we're anywhere near the top at this point. Now why would we not be? How could I be so bold as to say, despite the fact that mobile home park values are definitely up, that we haven't reached the limit of what they can be? Well, the first is the ability to increase rents because of course mobile home parks are an income property. As our income goes up, so does our value and rents in our industry could still double and be considered cheap. Now, why would that be? Well, because when they built these parks back in the 50s and the 60s, if you inflation adjust those rents through today, you'd have a read of about $500 or so per month. However, our current US average for mobile home park lot rents is only about $280 a month. So how can that be? How can we have gone all this time since the 50s in the 60s, half a century, and never even kept pace with inflation? That's what happened. Mom and pops didn't raise their rents along the way to meet inflation. So they did basically what I would call mom and pop quantitative easing. Don't take my word for it read the work of Charles Becker, the Duke economist, who wrote a paper about that same exact issue and came to that exact same conclusion.

Also, another way we raise our rents in the industry is by filling vacant lots. But we're still nowhere near full. Average occupancy in America is roughly still around 80%. We still have a fifth of our lot still to fill. Now one day those will be filled, but not yet. To fill a lot you have to go out and buy a new or used home, you have to get the lot ready, bring it on, prepare it and then sell it. It's a lot of steps, a lot of capital required to do it. Mom and pop don't do it at all, their occupancy never goes up. It's the new people bringing these old parks back to life to do all the heavy lifting on that. But there are still many more lots left to fill. The average mobile home park is nowhere near at its peak income potential between vacant lots and raising rents. There's still plenty of work to do.

Also, you have a continual perception change of value of mobile home parks. Number one, the industry is gaining status as a strong and needed industry. And what is that industry? Affordable housing. We're not about trailer parks or mobile home parks. We're about providing people inexpensive, great places to live that just happened to be detached with the yard, exactly what everyone American learned during COVID they truly desired. Next, our industry has extremely low loan default rates and that is very important. We've become kind of a darling of the lending industry. As a result, we can participate in some of the most attractive debt possible. Things that didn't even seem remotely even possible when I got in the industry back in the mid-90s. Today you can finance virtually any mobile home park with a range of seller financing, bank debt, CMBS conduit debt, or Fannie Mae and Freddie Mac agency debt,  and at incredibly low fixed rates. As more mobile home park product moves to these better loan products, you'll see a pump and value simply by the reallocation of lesser interest against that overall cost of owning the property.

Also, this negative stigma for mobile home parks appears to be wearing off. How do I know this? Well, if I turn on TV at any given moment, I go to HGTV or a similar channel, I'm going to see all kinds of shows about living small, tiny homes. American public is starting to embrace the entire original concept of the mobile home, which is basically having a functional space at a lower cost. It's not about sacrifice, it's about how your quality of life is oriented. People living not beyond their means, not being house poor. But instead, realizing that housing is a place to sleep. It's a place to gather the family. But there's more to life than just your house. As young people are learning the value of smaller homes, and as older Americans are retiring at the rate of 10,000 per day, everybody is starting to once again appreciate the very thing that mobile homes and mobile home parks have always provided. Meanwhile, all the shows that teased and made fun of mobile home parks and the residence for so many years have really died off. I haven't seen Jeff Foxworthy on TV in at least a decade. Trailer Park Boys off the air, Myrtle Manor off the air. Eight Mile is so outdated people forgot who Eminem even is anymore. There have been very few recent negative portrayals of those living in mobile home parks. At the rate we're going in the not too distant future, that whole trailer trash stigma will have finally gone away. And we'll all be very happy for that.

Finally, people are just starting to understand that we have the superior business model. How are we the superior business model of all the real estate sectors? Well, number one, you can't build mobile home parks anymore, something that no other sector real estate can boast. You can build a self-storage anywhere, an apartment anywhere. There's no limitations on retail, lodging, office, but you want to build a mobile home park today, good luck. Roughly 10 per year built in the US, while roughly 100 per year are being torn down. We're literally an endangered species. It's unlikely that city government will ever again allow construction of new mobile home parks. And that gives us that very special brand of scarcity. What Warren Buffett proudly calls a moat. If there's any moat in American business model, we have it.

And there's a second moat because mobile homes are truly not mobile. They never claimed that they were mobile. In 1976 when HUD took over the industry, they changed the name from mobile home to manufactured home because they didn't want to be misleading. The modern manufactured home is going to be larger and heavier and impossible to move frequently. The customers all know this when they buy them. It’s not a strike against the industry that the homes can't be moved easily. I don't know anyone who can easily move a condo or a regular stick built house either. But what's important is that solidity, that ability for the home not to leave, allows mobile home park owners to have an unusual advantage over apartments and self-storage and all of the real estate sectors is where it's much easier to move one property to the next. Additionally, since our customers typically own their homes, they’re stakeholders in the business. They care about our side of the equation, which is the land portion. I dare you to find any other sector of real estate in which the customer is a stakeholder because it just does not exist.

Finally, industry consolidation. In the years ahead, you're going to see all kinds of things happen to make mobile home parks even more valuable, simply due to industry consolidation, the run up in values that that will bring with it. The self-storage industry serves as the example. It's already three times more consolidated the mobile home park industry mostly thanks to public storage. However, there will be at some point consolidation in the meat and potatoes biggest part of our industry which is in fact affordable housing. Almost all of the consolidation today, every single American REIT is based only on that lifestyle choice dynamic of the industry and lifestyle choice is just a microcosmic part of those 44,000 mobile home parks out there. As we see industry consolidation start forming in the affordable side, then you will see a real run up in overall values. What will be the trigger for that? It'll be an affordable housing operator to go public. People have rumored for years now it would be Yes! Communities owned by GIC, the sovereign nation fund of Singapore. It makes logical sense that it could be but I don't know, it might not be them. But someone out there at some point will form the first affordable housing REIT. And that will put the bulk of the industry finally on the radar.

Now why all other sectors have pretty much hit the top, whether it's apartments, lodging, retail, office, it doesn't really matter which one you want to select. There's not much room to go. They've already hit top. They're pretty much like Microsoft today. But as for mobile home parks, we're just getting started. In many ways, we truly are Microsoft stock in 1996. This is Frank Rolfe, the Mobile Home Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.